Remarks by Lawrence Schembri

Deputy Governor of the Bank of Canada

Canadian Association for Business Economics
Kingston, Ontario
25 August 2015

The Long-Term Evolution of House

Prices: An International Perspective
Introduction
Thank you for the invitation to speak here today. Every August since 1961, when
John Diefenbaker was prime minister and you could buy a house for $15,000,
business and government economists have gathered here in Kingston to discuss
issues of the day. CABE has carried on this tradition of convincing economists to
attend a conference while everyone else is on vacation. The promise of a good
chart is probably all the convincing most of us need. Ive got plenty of those for
you today.
I want to talk to you about the evolution of house prices and the underlying
determinants of their long-term movements. As you know, developments in the
housing sector and the related mortgage market are important, for both the
Canadian economy and its financial system. My presentation, then, is part of our
ongoing effort at the Bank to promote an informed discussion of housing and
house prices.
In our quarterly Monetary Policy Report and our biannual Financial System
Review we usually take a here and now perspective. But today I want to
provide more context by stepping back and looking at house prices in two
dimensions:

across time, over the past 40 years; and

across countriesin particular, across a group of countries that share

economic circumstances and policy frameworks similar to Canadas.

Ill begin with a quick look at some stylized facts about the evolution of house
prices. Then, Ill examine their long-run determinants from both the demand and
supply sides. Finally, Ill comment on the implications of house prices for financial
I would like to thank Don Coletti, Jason Allen, Brian Peterson, Greg Bauer and Denis Gorea for
their help preparing this speech.
Not for publication before 25 August 2015
12:25 Eastern Time

-2stability and the recent experience with macroprudential housing-related policies,

including their complementary interaction with monetary policy.

House Price Trends

Lets start with trends in house prices. Chart 1 shows indexes of real house
prices since 1975 for two sets of advanced economies. Chart 1a shows Canada
and a set of comparable small, open economies (Australia, New Zealand,
Norway and Sweden) with similar macro policy frameworks and similar
experiences during and after the global financial crisis.1 In particular, they did not
have sizable post-crisis corrections in house prices.
For comparison purposes, Chart 1b shows a second set of advanced economies
that did experience significant and persistent post-crisis declines in house
prices.2
Chart 1: Real house prices have increased globally since 1995
1a. Real house price index; no postcrisis correction
Index: average = 100

Index
250

1b. Real house price index; post-crisis

correction
Index: average = 100

Index
250

200

200

150

150

100

100

50

50

Australia

Canada

New Zealand

Sweden

Norway

Source: Federal Reserve Bank of Dallas international house price database

Spain
Ireland
United States

United Kingdom
Italy
Last observation: 2015Q1

Three points about these charts.

First, there are notable variations across countries. While there is some common
movement, local circumstances clearly matter.
Second, broadly speaking, real house prices across both sets of countries
experienced no material upward trend from 1975 to 1995.
Third, a generalized upward movement in house prices began in the second half
of the 1990s and is continuing today, even after post-crisis corrections. Real
prices remain well above 1995 levels for almost all countries.
These trends suggest that there are common factors at the global level or
simultaneously in each country that have arisen over the past 20 years and have
pushed up real house prices. Understanding these common and idiosyncratic
determinants of house prices is important for both macroeconomic outcomes and
financial stability and thus the conduct of monetary and macroprudential policies.

-3-

A Framework for Analyzing House Price Trends

To analyze these trends, lets start with some basics. A house is simultaneously
both a consumption good and an asset. It delivers a stream of non-financial
housing services and, at the same time, is also a store of wealth. For most of us,
it is the largest asset we own.
A households decision to purchase a house depends on the utility of the
services it provides, its price, and its ongoing user cost. The user cost includes
depreciation, maintenance and interest costs, less the expected price growth. In
the housing market, the price is determined by the total demand for housing
services and the stock of houses. The equilibrium house price thus depends on
the user cost, which includes the expected price appreciation, and this, in turn,
depends on the expected evolution of demand and supply factors.
To complicate matters, a number of other dimensions influence the choice of the
data being analyzed:

Housing can be owner-occupied or rented.

Housing units can be single-family houses or multiple-unit dwellings.

Housing is a composite good consisting of both a structure and land.

Housing prices can be for existing or new houses, or both.

For my purposes today, Ill focus primarily on owner-occupied houses, the total of
singles and multiples and the composite price for existing houses measured at
the national level.3

Demand Factors
Four broad sets of demand factors have likely contributed to rising real house
prices across advanced economies since 1995:

macroeconomicrising disposable incomes and lower long-term interest

rates;

demographicpopulation growth, driven in part by migration, and shifts in

age structure and family size;

credit conditionsbroader access to and more efficient funding of

mortgage credit due to financial liberalization and innovation; and

other factorsimprovements to the macro-policy framework, international

investment, preference shifts and regulatory and tax changes.

House prices and income

First, lets look at house prices and income. Since 1995, house prices in Canada
and the set of comparable countries have increased faster than nominal personal
disposable income (Chart 2a).4 During this period, all of these countries
experienced solid income growth, with the strongest growth in Norway and
Sweden (Chart 2b).

-4Chart 2: House prices have increased relative to income

2b. Real personal disposable income

2a. Nominal house price/income ratio

Index

Index: average = 100

Index

Index: average = 100

200

180

180

160

160
140
140
120
120
100

1995Q1

2000Q1
Australia

2005Q1
Canada

2010Q1

80
2015Q1
Norway

New Zealand
Sweden
Source: Federal Reserve Bank of Dallas international house price database

100

1995Q1

2000Q1

2005Q1

Australia

Canada

New Zealand

Sweden

2010Q1

80
2015Q1
Norway

Last observation: 2015Q1

During the global financial crisis, these countries also experienced house price
corrections. This caused the ratios of house prices to income to decline
temporarily, after which they continued climbing.
So why did house prices rise faster than income?
Demographics
There are a number of possible explanations. Consider population growth.
Chart 3a shows population growth rates in our set of comparable countries over
two periods, 1975 to 1994 and 1995 to 2015. Population growth rates were the
highest in Australia, Canada and New Zealand over the entire sample. Moreover,
growth rates increased in all countries, except Canada, in the post-1995 period
relative to the pre-1995 period. Therefore, population growth could help explain
the rise in house prices relative to income for most countries over the latter part
of the sample.5
One of the factors that has affected population growth rates is migration. Net
migration was highest in Australia and Canada over the entire sample. In
addition, net migration increased importantly in all five countries in the second
half of the sample period (Chart 3b).6
In Australia, Canada and New Zealand, the rate of population growth of the
approximate house-owning cohort of those aged 25 to 75 declined in the second
part of the sample period. This likely reflects the aging of their populations as the
postwar baby boom generation moved from youth into middle age (Chart 4).
Nonetheless, the growth rate of this cohort still remains well above 1 per cent for
these three countries.

-5Chart 3: Population growth has contributed to house price increases, aided

by net migration
3b. Net migration to total population

3a. Total population growth

Average annual growth rate

Average annual as a per cent

0.8

1.5

0.6
1.0
0.4

0.5
0.2

0.0

0.0
Australia

Canada

Norway

New Zealand

Sweden

Australia

Canada

Norway

New Zealand

Sweden

Note: solid bars = 1975-94; shaded bars = 1995-2015

Source: U.N. population statistics

Chart 4: Population growth in house-owning age cohort has declined in

some countries
Population growth, age 25-75
Average annual growth rate

%
2.5

2.0

1.5

1.0

0.5

0.0
Australia

Canada

Norway

New Zealand

Sweden

Note: solid bars = 1975-94; shaded bars = 1995-2015

Source: U.N. population statistics

In Canada, it is noteworthy that the average family size decreased from about 3.5
in 1976 to below 3.0 in 2011, a decline of approximately 20 per cent.7 Partial
evidence suggests that this pattern is similar in the other advanced economies in
our sample. This decline in the average family size has supported the rate of
household formation, and thus, has partially offset the impact of the lower growth
rate of the house-owning cohort on the demand for houses in Australia, Canada
and New Zealand.8

-6It is also important to consider where population growth is occurring. Chart 5

shows that over our sample period, the pace of urbanization, measured by the
change in the urbanization ratio, has increased since 1995 in all of the countries
in the comparable group, except New Zealand.9 Australia and Canada are
notable for the size of the shift, which could be explained by a number of factors.
These include the well-known agglomeration economies of scale provided by
urban areas and the location preferences of home-owners, especially youngerage cohorts and recent immigrants.10
Chart 5: Increasing urbanization is important
Urbanization increase

Average annual growth rate

0.5

0.4

0.3

0.2

0.1

0.0
Australia

Canada

Norway

New Zealand

Sweden

Note: solid bars = 1975-94; shaded bars = 1995-2014

Source: World Bank

The urbanization of the population in Norway also stands out. This could
potentially explain why house prices have grown faster in Norway than in
Canada, even though population growth in Canada has been higher than in
Norway.
To sum up, population growth and the shift in demand for housing toward urban
areas have exerted strong upward pressure on house prices.
Credit conditions
A third demand factor affecting house prices is the improvement in mortgage
credit conditions. Lower long-term interest rates and financial liberalization and
innovation have improved housing affordability in advanced economies,
especially since the mid-1990s. Ill say a few words about each of these changes
that have influenced the availability of credit.
Since 2000, real 10-year government bond yields have trended downward across
all advanced countries, including those in our comparison group, with a slight
increase during the recent financial crisis (Chart 6).

-7Chart 6: Real long-term interest rates have trended downward since 2000
%

Real 10-year government bond yields

10

1995Q1

2000Q1
Australia

2005Q1
Canada

Norway

Sources: OECD Economic Outlook, IMF International Financial Statistics, OECD Main Economic Indicators,
Bank of Canada calculations

2010Q1
New Zealand

-2
2015Q1
Sweden
Last observation: 2015Q1

The decline in yields has been attributed to higher global savings and stronger
monetary and fiscal policy frameworks, which have credibly reduced inflation and
risk premiums by increasing macroeconomic stability in the roughly 15-year
period (known as the Great Moderation) that preceded the global financial
crisis.11 Since the crisis, persistently weak global demandespecially real
investmentcoupled with sustained low central bank policy rates and large asset
purchases has helped to lower long-term interest rates and, in turn, reduce
financing costs for financial intermediaries and mortgage rates for households.12
Other things being equal, this decline has helped improve the affordability of
home ownership and support demand for houses.
Credit conditions have been positively affected by financial liberalization and
innovation. Recent work by the International Monetary Fund has catalogued the
related effects of these two factors on access to housing market finance and
mortgage market development across countries.13
The trend in advanced economies from the mid-1990s until the crisis has been
toward higher maximum loan-to-value ratios, longer amortizations for mortgage
borrowers and more flexible funding arrangements for mortgage lenders in terms
of covered bonds and mortgage securitization. The assessment and
diversification of mortgage credit risk have also improved. As a consequence, a
broader set of borrowers and lenders has become involved in obtaining and
providing mortgage finance.
Chart 7a, shows a positive relationship between a summary index of mortgage
finance conditions, constructed by the IMF, which captures both financial
liberalization and innovation, and the depth of the mortgage markets across
several advanced economies.14 Although data for New Zealand are not available,

-8the chart indicates that the other four countries in our comparison group have
mortgage finance conditions in place that generate deep mortgage markets and
foster broad and often less procyclical access to mortgage finance. Again, other
things equal, this supports demand for owner-occupied housing and higher
house prices.
Chart 7b shows that home-ownership rates in Canada and Sweden (over a
shorter sample period) have risen, suggesting that these changes to mortgage
finance have had a positive impact on housing affordability. In Australia, the rate
of home ownership has declined. This may be due to a more modest change in
mortgage credit conditions. Or, more likely, affordability has been eroded by
rapidly rising house prices, which have increased the most in Australia among
the comparison group. For Norway, there has been no material change in the
home-ownership rate over this limited time period.15
Chart 7: Housing finance index, mortgage market depth and home
ownership rates
7a. IMF mortgage market index and ratio
of residential mortgage-debt-to-GDP
United
States

(%)

7b. Home-ownership rates

Index
1.0

90

85

Denmark
0.8

Sweden

Australia

80
Netherlands

Canada

0.6

Norway

75

United
Kingdom
0.4

Spain
Italy

70

France
65

0.2

60
0.0
0

20

40

60

80

100

Residential mortgage-debt-to-GDP ratio

(2001-06 average, %)
Source: IMF, 2008

Last observation: 2008

1995

2000
Australia

2005
Canada

2010
Norway

Sweden

Sources: Australian Bureau of Statistics, Statistics Canada, and Eurostat.

Data for Australia available only in biannual frequency from 1998-2012,
missing values estimated using linear interpolation.
Last observation:2013

As I noted earlier, important innovations have fostered deeper, more efficient and
diversified mortgage financing. Ill comment on the two most significant: covered
bonds and securitization.
Covered bonds have been popular in Denmark for a long time. They were
introduced and have become more widely used in Sweden and Norway and, to a
lesser extent, in Canada, Australia and New Zealand (Chart 8a).
These bonds have played a growing role in mortgage finance in the post-crisis
period because they are generally viewed as safer than private-label
securitization. They give investors access to dual collateral: the mortgages
securing the bonds as well as other assets on the issuers balance sheet should
the mortgages prove insufficient.16

-9Securitization of mortgages also increased significantly in the pre-crisis period in

some countries, especially private-label securitization in the United States
(Chart 8b). While these vehicles were successful in raising large amounts of
mortgage funding before the crisis, they were an important source of financial
vulnerability during the crisis because the incentives to originate and securitize
subprime mortgages were misaligned and the related risks were opaque and not
well priced.
Chart 8: Mortgage funding by covered bonds and securitization has risen
8a. Covered mortgage bonds outstanding
as a share of total household credit

8b. Mortgage securitization outstanding

as a share of total mortgage credit Securitization

%
8

%
200

150

100

50

share (%)
60

45

30

15

Canada (left scale)

Australia (left scale)
Sweden (right scale)
Sources: ECBC, BIS and Bloomberg

New Zealand (left scale)

Norway (right scale)
Denmark (right scale)
Last observation: 2013

Private Securitization - United States

Public/Agency Securitization - United States
Private Securitization - Canada
Public /Agency Securitization - Canada
Total Securitization - Australia
Sources: CMHC, Bank of Canada, Haver
Analytics, U.S. Federal Reserve

Last observation: 2015Q1

Since the crisis, we have seen a dramatic decline in private-label securitizations

of residential mortgages, which has not recovered, despite global financial reform
efforts led by the G-20 to address the serious weaknesses in their design.
Publicly supported securitization has continued to play an important role in
funding residential mortgages over this period, however, especially in the United
States and Canada.
Other factors supporting demand
A number of other related factors have likely supported the demand for houses in
our comparison group and in advanced economies more generally.
All of the countries in our comparison group had solid macro and financial
policies characterized by

monetary policy frameworks comprising explicit and credible inflation

targets and flexible exchange rates;

sustainable fiscal positions; and

effective financial regulatory and supervisory frameworks.17

- 10 As a result, these countries achieved a high degree of macro and financial

stability over the post-1995 period; in particular, they kept inflation low. This
stability had a number of important consequences. It reduced uncertainty for
households and firms. As noted, it also lowered risk premiums and long-term
interest rates.18 And it fostered financial and mortgage market development.
These countries all coped with the crisis and its aftermath relatively well.
Economic and financial stability strengthened the demand for houses because it
enhanced the perception that they are safe, high-quality assets.19 Consequently,
households may have decided to shift more of their wealth into housing and
consume more housing services as their income increased by buying more
owner-occupied dwellings over time. This trend was supported by government
policies (although not widespread in our comparison group) to promote home
ownership, especially for younger and lower income households.20

Supply Factors
Now lets look at the supply factors that have influenced the prices of houses, in
particular, regulation and geography. Such supply constraints tend to be most
binding in urban areas. Coupled with the observed shift in demand related to
population growth in urban areas, supply constraints may have put significant
upward pressure on house prices in urban areas in advanced economies.
The regulatory factors include land-use or zoning restrictions that specify, for
example, minimum lot sizes or maximum development density; the establishment
of greenbelts around urban areas, which represent a more sweeping land-use
restriction; and development fees.
In terms of geographical constraints, the most common are bodies of water and
landscape features such as mountains, wetlands and other terrain not suitable
for residential development.
To what extent are these sorts of constraints affecting house prices in urban
areas? Chart 9 provides some suggestive evidence on the impact of land-use
regulations on median price-to-income ratios. Many of the cities with higher ratios
also have obvious geographical constraintsHong Kong and Vancouver are
good examplesso the two sources of supply restrictions likely interact to put
upward pressure on prices.
To examine the implications of these supply constraints, it is useful to consider
the impact of urban population density on house prices.
Chart 10 indicates that, over the period from 1995 to 2014, there was a strong
positive relationship between increases in population density and house prices in
Canadian urban centres.21, 22
Greater population density, combined with regulatory and geographical
constraints, creates price incentives that cause shifts in the available housing
mix.23 In particular, as the prices of single-family homes rise, condos become a
more affordable alternative.

- 11 Chart 9: Land-use regulation and geographical constraints increase the

price-to-income ratio
Median price-to-income ratio and land-use regulation: 2014
Hong Kong
Vancouver
Sydney
San Francisco
Melbourne
London (GLA)
Los Angeles
Toronto
New York
Tokyo
Montreal
Calgary
Saskatoon
Edmonton
Las Vegas
Winnipeg
Ottawa
Chicago
Houston
Detroit
0

More-restrictive regulation
(Canada)

9
Median multiple

More-restrictive regulation
(International)

12

15

Less-restrictive regulation
(Canada)

18

Less-restrictive regulation
(International)

Source: Demographia International Housing Affordability Survey: 2015

Chart 10: House prices rise with increases in urban density: 1995-2014
Price change (%)
250

Calgary
Winnipeg

225

Edmonton

200
Toronto
Quebec City

175

Montral
150

Ottawa

Vancouver

125
100
-20

-10

10
20
30
Change in population per square kilometre (%)

40

50

60

Sources: MLS home price series (Quebec City and Montreal data from Teranet House Price Index), Statistics Canada.

In Vancouver, bounded on three sides by water with coastal mountains as a

backdrop, condo development has dominated housing starts since the early
1990s. We are now seeing a similar shift to condos in Montral and Toronto
(Chart 11).24 In recent years, Toronto and Vancouver have seen price growth in
single-family houses outpace multiples (mainly condos) by a factor of two to
three. About a third of the Canadian housing stock is in Toronto, Montral and
Vancouver so this change is significant. Outside of Canadas big three cities,
condos are only now becoming as important as single-family homes.

- 12 Given these supply constraints, the increasing urbanization of Canadas

population is putting upward pressure on Canadian house prices.
Chart 11: With increasing population density and binding supply
constraints, multi-unit starts are dominating in Canadas biggest cities
11a. Vancouver

000s of units

11b. Montral

000s of units

21600

30000

16600

23000

11600

16000

6600

9000

2000

1600
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Single family house starts

11c. Toronto

Single family house starts

Multi-unit starts
000s of units

11d. Rest of Canada

Multi-unit starts
000s of units

40200

61600

31200

48600

22200

35600

13200

22600

4200
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Single family house starts

Multi-unit starts

Note: vertical lines indicate when multi-unit starts outpaced single family starts in urban areas
Source: CHMC

9600
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Single family house starts

Multi-unit starts
Last observation: 2014

Policy Implications
In view of these demand and supply factors, which have tended to work together
to cause house prices to rise faster than income since 1995 in advanced
countries, especially in urban areas, what are the implications for monetary policy
and, perhaps more importantly, for financial stability policy?
The advanced economies in our comparison group had similar experiences
during and after the global financial crisis. They suffered sizable declines in
exports to their major trading partners that were more severely affected by the
crisis. Their domestic financial institutions and markets were adversely affected
by spillovers from global financial stresses. Liquidity and credit conditions
tightened severely.
In response, they loosened monetary policy, with sharp declines in policy interest
rates. Their credible inflation-targeting frameworks, flexible exchange rates and
resilient financial systems meant that such countercyclical monetary policy
easing was effectively transmitted into lower real interest rates along the maturity
spectrum. This easing supported the economic recovery by boosting domestic

- 13 demand, notably in sectors sensitive to interest rates, such as housing, and

caused house prices to recover from declines experienced during the crisis.
But, to date, the global recovery has been weak, so global and domestic interest
rates have remained at historically low levels. This has underpinned the demand
for, and the prices of, houses in the post-crisis period.
Since elevated house prices have important implications for financial stability, the
Bank of Canada is closely monitoring the housing market. In particular, as we
noted in recent issues of our Financial System Review, rising house prices
contribute to two material vulnerabilities that can affect financial stability:
1. Higher house prices are generally associated with higher levels of
household indebtedness and leverage.25
2. Higher house prices represent a potential source of asset-price
misalignment if influenced by expectations of price appreciation not
consistent with evolving fundamentals.26 Such misalignment could
suddenly correct and create financial stress.27
The likely trigger for both vulnerabilities would be a major global shock that
generated a sharp increase in unemployment and possibly in interest rates as
well. If these vulnerabilities were triggered, the adverse impact on the financial
system and the economy would be amplified by the exposure of banks and other
intermediaries to them.
Now, when we look at the post-crisis experiences of the countries in our
comparison group, they have similar levels of household leverage, measured by
household debt as a ratio of GDP (Chart 12).28 Household leverage has risen
along with house prices, as households have taken advantage of low post-crisis
interest rates. The one exception is New Zealand, where a modest degree of
household deleveraging seems to have occurred. For Canada, the ratio of
household debt to GDP has risen since 1975, although the growth of this ratio
has notably declined since 2010. For Sweden and Norway, the ratio also grew at
a modest pace in the post-crisis period.29
Chart 12: Household leverage has grown, especially since 1995
Ratio

Ratio of household-debt-to-GDP

1.2

1.0

0.8

0.6

0.4

1975Q1

1980Q1
Australia

1985Q1

1990Q1
Canada

1995Q1

2000Q1

Norway

Sources: Bank for International Settlements (BIS), nominal GDP statistics for all countries are from the
OECD Economic Outlook database

2005Q1
New Zealand

2010Q1

0.2
2015Q1
Sweden

Last observation: 2014Q4

- 14 -

The inflections in the rate of leverage growth that we see in the chart after the
crisis may be due to the macroprudential measures these countries
implemented. Such measures have allowed stimulative monetary policy to flow
through to households with the capacity to borrow.30
Charts 13a and b draw on recent work by the IMF, which shows that
macroprudential policies in the form of maximum loan-to-value (LTV) or debt-toincome (DTI) ratios have tightened across a broad range of countries over the
past 10 years.31 The IMFs research, as well as that of other economists, has
found evidence suggesting that the tightening has helped to:

reduce the procyclicality of household credit and bank leverage;

moderate credit growth;

improve the creditworthiness of borrowers; and

lower the rate of house price growth.

The most effective macroprudential policies to date appear to have been the
imposition of maximum LTV and DTI constraints.32 Increased capital weights on
bank holdings of mortgages have also had an impact.33 While long-term evidence
on these instruments is not yet available, permanent measures that address
structural regulatory weaknesses and that are relatively straightforward to
implement and supervise will likely be the most effective over time.
Chart 13: The use of macroprudential policies to address housing
vulnerabilities is increasing
13a. Loan-to-value ratio restrictions have
increased for all groups of economies
since 2000

2004

2008

52

40

39

30

26

20

13

10

0
2000

13b. Debt-to-income constraints have been

used primarily by advanced and emerging
economies

2012

0
2000

2004

2008

2012

Total

Advanced Economies

Total

Advanced Economies

Emerging Economies

Developing Economies

Emerging Economies

Developing Economies

Source: IMF

Last observation: 2013

In Canada, we have had four successive rounds of macroprudential tightening,

primarily in terms of the rules for insured mortgages (Figure 1). Ill mention just a
few of the highlights. The maximum amortization period for insured loans has

- 15 been shortened from 40 years to 25.34 LTV ratios have been lowered to 95 per
cent for new mortgages, and 80 per cent for refinancing and investor properties.
These latter two changes effectively eliminate new insurance for refinancing and
investor properties. Qualification criteria such as limits on the total debt-service
ratio and the gross debt-service ratio, as well as requirements for qualifying
interest rates, have also been tightened.35
Figure 1: Macroprudential tightening in Canada: 2008-12

Recent evidence suggests that these measures have resulted in higher average
credit scores, which have improved the quality of mortgage borrowing (Chart
14a). With respect to household credit growth, Chart 14b, shows that the trend
growth of mortgage credit declined from 14 per cent in 200708 (3-month growth,
annualized) to around 5 per cent in 201315.36
Chart 14: Canadian post-crisis macroprudential policies have contributed
to higher borrower quality and lower household credit
14a. Distribution of credit scores at
origination (high-ratio CMHC mortgages)

14b. Mortgage credit

%

%
20

Annualized 3-month growth rates

90
80
70

15

60
50
10

40
30
20

10
2002

2004
2006
2008
Under 600
660-699
Sources: CMHC Annual Report 2012 and
Canadian Housing Observer 2012

0
2010
2012
600-659
700 and over
Last observation: 2012

0
2007

2009

2011

2013

2015

Note: The vertical lines represent the implementation of changes

to government-backed mortgage insurance.
Source: Bank of Canada
Last observation: June 2015

- 16 -

Conclusion
Let me conclude with a few key points from the mountain of facts, graphs and
analysis that I have reviewed with you today. As I mentioned at the outset, the
purpose of my presentation is to help provide more context for an informed
discussion about housing and house prices given their importance to the
Canadian economy and the financial system.
First, real house prices have been rising relative to income in Canada and other
comparable countries for about 20 years. There are many possible explanations,
mostly from the demand side, but also from the supply side.
Second, in terms of demand, demographic forces, notably migration and
urbanization, have played a role in the evolution of house prices, as have
improving credit conditions through lower global real long-term interest rates and
financial liberalization and innovation. There are, of course, other demand factors
that warrant more data and analysis, including the impacts of foreign investment
and possible preference shifts.
Third, in terms of supply, the constraints imposed by geography and regulation
have decreased housing supply elasticity, especially in urban areas. This
reduced supply elasticity has interacted with demand shifts toward more
urbanization to push up house prices in major cities.
Fourth, the credible and effective macro and financial policy frameworks in place
in Canada and the other countries considered here have contributed to a high
degree of macroeconomic and financial stability. Consequently, in the face of a
protracted global recovery, their countercyclical policies successfully
underpinned domestic demand in the post-crisis period. The resulting strength in
the housing market has increased household imbalances, but the risks stemming
from these vulnerabilities have been well managed by complementary
macroprudential policies.
The experience in these countries therefore suggests that macroprudential
policies that address structural weaknesses in the regulatory framework are best
suited for mitigating such financial vulnerabilities. They reduce tail risks to
financial stability and enhance the overall resilience of the financial system.
Thank you. Enjoy these last few days of summer.

Endnotes

1 Although these economies were not at the centre of the crisis, they were severely affected by it and the subsequent
recession. They did not experience significant bank failures so the normal channels of mortgage finance continued to
operate. Banks in these jurisdictions typically draw on external sources for some of their funding. During the peak of the
crisis, these sources largely dried up and banks received temporary liquidity support from public sources. In Canada, for
example, the federal government implemented the Insured Mortgage Purchase Program in 2009.

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2 These house price measures are indexes, not levels, rebased from the real house price database of the Federal
Reserve Bank of Dallas, with the average of each countrys index for 2005 representing 100. The charts show house price
movements for individual countries relative to their average over the period from 1975 to the first quarter of 2015.
3 Because of these multiple dimensions, as well as regional influences within a country, housing and house prices are
intrinsically heterogeneous. Therefore, price measures are necessarily indexes. The SP/Case-Shiller city-level indexes of
repeated sales control for quality, but their availability is limited to a few jurisdictions. In Canada, the equivalent to the
Case-Shiller is the Teranet/National Bank Composite House Price Index. The Bank of Canada uses this index and the
Canadian Real Estate Association MLS Home Price Index, as well as the MLS average for monitoring purposes. These
three price indexes have exhibited the same upward trend.
4 Nominal personal disposable income was rebased to be consistent with the rebased house prices in each country, as
described in footnote 2.
5 Sweden had the lowest rate of population growth among these countries, but it also experienced the largest increase in
real house prices between 1995 and 2015.
6 The home-ownership rate of immigrants is slightly less than that of native-born residents in all five countries. Indicators
of Immigrant Integration: Settling In, OECD Publishing, 2 July 2015, p. 179.
7 Fifty years of families in Canada: 1961 to 2011, Statistics Canada.
8 In Canada, the evidence indicates that much of the increase in home ownership is among the older cohort of the
population, which suggests that longer and healthier life spans may have supported house demand in recent years.
9 For example, the urbanization ratio in Canada increased from 75.61 per cent in 1975 to 77.68 per cent in 1995 and
81.65 per cent in 2014. New Zealand is the most urbanized country in the sample; its ratio was already above 80 per cent
in 1975.
10 See, for example, Agglomeration Economics, edited by Edward L. Glaeser, National Bureau of Economic Research
Conference Report (Chicago: University of Chicago Press, 2010).
11 For more on the decline in real long-term interest rates, see C. Wilkins, Monetary Policy and the Underwhelming
Recovery (speech to the CFA Society, Toronto, 22 September 2014).
12 For example, in Canada discounted 5-year mortgage rates have declined by about 470 basis points since 2000, from
just above 7.25 per cent to 2.55 per cent.
13 See International Monetary Fund Housing and the Business Cycle in World Economic Outlook, April 2008; and E.
Cerutti, J. Dagher and G. DellAriccia Housing Finance and Real-Estate Booms: A Cross-Country Perspective, IMF Staff
Discussion Note, June 2015.
14 See International Monetary Fund Housing and the Business Cycle in World Economic Outlook, April 2008
15 Comparable time-series data for New Zealand are not available.
16 Since covered bonds are relatively senior in the creditor hierarchy in the event of insolvency, they have a preferential
claim over depositors and other debt-holders.
17 All of the countries, except Sweden, are significant commodity exporters. From 2002 until 2014 they benefited from
rising commodity prices.
18 Credibly reducing expected inflation also contributes to lower nominal mortgage rates. The effect of this is to spread
the real burden of servicing a mortgage more evenly over its term.
19 Foreign investors also perceived these countries as attractive locations to invest in real estate, although the impact of
their investment on house demand and prices in the countries is unlikely to be widespread. A recent survey of
international real estate investors found that Australia, Canada, Sweden and several other countries represent the most
stable and secure environments for real estate investment. (See Foreign Investment Survey, Association of Foreign

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Investors in Real Estate, January 2013.) The IMF, in a review of existingalbeit scarceevidence, concluded that the
impact of foreign investors on real estate prices is not pervasive, but is limited to certain urban markets and at higher price
ranges. (See H. Ahir, H. Kang and P. Loungani, Seven Questions on the Global Housing Markets, IMF Research Bulletin,
September 2014.)
20 Examples of such policies include favourable tax treatment (mortgage interest deductibility, reduced capital gains, tax
deferred home-ownership savings programs) and public mortgage guarantees.
21 Given recent rises in house price, the increase for Vancouver shown in Chart 10 is lower than might be expected
because the starting point of the sample (1995) was a significant peak for prices in Vancouver. House prices shot up 34
per cent from 1990 to1995 while other Canadian cities had either negative or minimal growth of less than 10 per cent.
From 1995-2005, house prices in Vancouver rose by 48 per cent, but that was outpaced by price increases in other
Canadian cities that ranged from 65 to almost 140 per cent. Winnipegs decline in population density is, in part, due to a
30 per cent increase in its municipal boundaries over this period.
22 This relationship is also true for U.S. cities. See Urbanization & Canadian REITs, CIBC Institutional Equity Research
Industry Update, April 2012.
23 As cities grow, the price of housing in the urban core typically rises faster than in the periphery. This steepening of the
rent curve reflects the agglomeration economies as well as the higher opportunity cost of commuting. See D. Capozza
and L. Helsey, The Fundamentals of Land Prices and Urban Growth, Journal of Urban Economics, 26, no. 3 (1989):
295-306.
24 City authorities have also encouraged condo development to achieve higher densities in certain areas and control
infrastructure costs.
25 See, for example, A. Crawford and H. Faruqui What Explains Trends in Household Debt in Canada? Bank of Canada
Review (Winter 201112): 315.
26 Extrapolative house price expectations may arise during periods of strong house price growth driven by shifts in
demand and supply factors. See E. Cerutti, J. Dagher and G. DellAriccia Housing Finance and Real-Estate Booms: A
Cross-Country Perspective, IMF Staff Discussion Note, June 2015
27 The December 2014 and June 2015 issues of the Financial System Review examine various estimates of the degree
of overvaluation of Canadian houses.
28 The household debt-to-GDP ratio is more consistently measured across countries than the household debt-todisposable income ratio and is thus more useful for comparison purposes.
29 While the significant reductions in interest rates in the immediate aftermath of the financial crisis increased house
affordability in these countries, this gain has been offset by the ongoing increases in house prices. For example, Chart 6
in the December 2014 Financial System Review shows that the affordability of houses in Canada has been relatively
unchanged since 2008.
30 Evidence in Debt and (Not Much) Deleveraging (McKinsey Global Institute, February 2015) suggests that much of the
debt in countries in the comparison group is held by relatively high-income households.
31 E. Cerutti, S. Claessens, and L. Laeven, The Use and Effectiveness of Macroprudential Policies: New Evidence, IMF
Working Paper WP/15/61, March 2015.
32 Ibid.
33 Mortgage underwriting standards have also been tightened recently in many countries, as they have implemented the
Financial Stability Boards Principles for Sound Residential Mortgage Underwriting Practices, April 2012.
34 Uninsured mortgages are still available with longer amortizations; the normal maximum is 30 years.

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35 The total debt-service ratio is the percentage of gross annual income required to cover annual payments associated
with housing and all other debt obligations. The gross debt-service ratio includes only housing-related payments. Other
changes to insured mortgages include a minimum credit score, with limited exceptions; stronger loan documentation
standards to ensure the reasonableness of the property value and of the borrowers sources and level of income;
mortgage insurance eliminated for non-amortizing home-equity lines of credit; and mortgage insurance now limited to
homes with a purchase price of less than $1 million. In addition, mortgage and mortgage insurance underwriting principles
have been made consistent with international standards. See Guidelines B-20 and B-21issued by the Office of the
Superintendent of Financial Institution.
36 Other factors also influenced the growth of mortgage credit over this period. In particular, note that in late 200809 the
Canadian economy was in a recession. The decline in that period should not be interpreted as a result of the first wave of
tightening of the mortgage rules. Similar evidence on the impact of these macroprudential policies is found by I. Krznar
and J. Morsink, With Great Power Comes Great Responsibility: Macroprudential Tools at Work in Canada, IMF Working
Paper WP/14/83, May 2014.